PrefBlog

TXPR closed at 544.36, up 0.52% on the day. Volume today was 556,320, lowest of the past 21 trading days.

CPD closed at 10.75, up 0.19% on the day. Volume was 90,700, second-lowest of the past 21 trading days.

ZPR closed at 9.04, up 0.22% on the day. Volume was 111,880, lowest of the past 21 trading days.

Five-year Canada yields were up a bit to 3.43% today.

Equities were down a bit today, but the annual figures got more attention:

U.S. and Canadian stocks ended the final trading session of 2022 lower on Friday, capping a year of sharp losses driven by aggressive interest rate hikes to curb inflation, recession fears, the Russia-Ukraine war and rising concerns over COVID cases in China.

Wall Street’s three main indexes booked their first yearly drop since 2018 as an era of loose monetary policy ended with the Federal Reserve’s fastest pace of rate hikes since the 1980s.

This also marked their biggest yearly declines since the 2008 financial crisis, largely driven by growth shares as the Fed’s rate hikes boosted U.S. Treasury yields and made stocks less attractive.

The TSX’s 2022 losses were less sharp, but the Canadian index still lost more than 8% this year, also its first annual decline since 2018.

Bond yields popped up today:

The yield on the benchmark U.S. 10-year Treasury rose for a third straight day on Wednesday, reversing an earlier decline, as investors attempted to navigate the impact of China’s reopening policy on the path of interest rate hikes by the U.S. Federal Reserve.

While China has quickly reversed course on its previous “zero-COVID” policy this month, which is likely to benefit the global economy, the change has come with a surge in cases that could hamper the economy in the short-term.

The yield on 10-year Treasury notes was up 2.5 basis points to 3.883% after hitting a six-week high of 3.89%. On Tuesday, the 10-year jumped 11.1 basis points, its biggest one-day rise since Oct. 19.

Five year Canadas are now at 3.40%.

An op-ed in the Globe looked at Marginal Effective Tax Rates:

Parents across the country may be thinking about taking on an extra shift or an extra job to pay off bills from the holiday season or keep up with the rising costs of day-to-day items. What these hard working parents pocket from extra work not only depends on the taxes they pay on that additional income, but also on how much their income-tested government benefits such as the Canada Child Benefit or the Canada Workers Benefit will be reduced or “clawed back.”

In a recent C.D. Howe Institute study, we calculate the total impact of taxes and benefit clawbacks on families with children, giving us what we call “effective” tax rates. We found that parents in low-income families in particular face high effective tax rates. For instance, more than one-in-three face the prospect of bringing home less than 50 cents of every dollar they earn from extra work. High effective rates reduce the incentive to take on more work and get ahead.

They propose four different measures to address the issue:

• Avoid Very High Rates by Better Integrating New Benefit Programs
• Benefit Shields
• Income Averaging
• Childcare Subsidization

What’s a benefit shield? I’m glad you asked:

In 2016, the Quebec government, following through on a key recommendation from the 2015 Quebec Taxation Review Committee chaired by Luc Godbout, instituted a “benefit shield”11 partly compensating workers for the loss of certain income-tested tax credits – but only in the first year after they take on more work. On the assumption that work decisions are mostly influenced by short-term financial considerations, the shield approach enables governments to provide relief from high effective tax rates at a low fiscal cost (because relief is only offered for one year after taking on extra work) while maintaining the same level of generosity of targeted cash benefits.

More than 274,000 Quebecers took advantage of the shield in 2018, for a cost of only $49 million. Originally, the credit ceiling was set at $2,500 per worker, but has since been increased to $4,000 in successive budgets (CRFFP 2019).

However, I was disappointed by the absence of a Guaranteed Annual Income as a suggested policy measure.

PerpetualDiscounts now yield 6.60%, equivalent to 8.58% interest at the standard equivalency factor of 1.3x. Long corporates yielded 4.86% on 2022-12-16 and since then the closing price has changed from 15.46 to 14.67, a decline of 511bp in price, with a Duration of 12.42 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies an increase in yield of about 41bp since 12/16 to 5.27%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to 330bp from the 355bp reported December 21.

Yields popped up again:

U.S. Treasury yields rose on Friday after data showed that personal income rose more than expected in November while inflation data for October was revised upward, supporting the view that the Federal Reserve will continue to hike rates as it battles stubbornly high price pressures.

Personal income rose by 0.4% in the month, beating economists’ expectations for a 0.3% gain.

The personal consumption expenditures (PCE) price index rose 0.1% last month and its October gain was revised upward to 0.4%, from 0.3%. In the 12 months through November, the PCE price index increased 5.5% after advancing 6.1% in October.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, also edged up 0.1% in November, while data for October was revised upward to show spending surging 0.9% instead of 0.8% as previously reported.
…
Other data on Friday showed that U.S. consumers expect price pressures to moderate notably in the next year, with a benchmark survey on Friday showing their one-year inflation outlook dropping to the lowest in 18 months in December.

Benchmark 10-year yields rose 9 basis points to 3.749%, and two-year yields gained 7 basis points to 4.330%.

Merry Christmas, everybody!

TXPR closed at 540.38, up 0.70% on the day. Volume today was 2.34-million, near the median of the past 21 trading days.

CPD closed at 10.77, up 0.37% on the day. Volume was 149,950, near the median of the past 21 trading days.

ZPR closed at 8.98, up 0.90% on the day. Volume was 215,060, below the median of the past 21 trading days.

Five-year Canada yields were up a bit to 3.10% today.

There was another Canadian inflation report today:

Canada’s inflation rate eased in November, as an acceleration in grocery and rent prices was offset by a decline at the gas pump.

The Consumer Price Index rose 6.8 per cent compared to the previous year, Statistics Canada reported Wednesday. That’s down from 6.9 per cent in October, although slightly ahead of economist expectations of 6.7 per cent.

On a monthly basis, CPI rose 0.1 per cent compared to a 0.7-per-cent gain in October.

While overall CPI inflation continued trending down from a peak of 8.1 per cent reached in June, core inflation measures that strip out volatile food and gasoline prices ticked up slightly in November. That could increase the odds that the Bank of Canada raises interest rates again in January.
…
Canadians got a slight break at the gas pump, where prices fell 3.6 per cent compared to October. The price of gasoline was still 13.7 per cent higher than last November.

There was little relief at the grocery store, where prices were up 11.4 per cent compared to the previous year – a bigger annual jump than in October. The price of chicken was up 9.3 per cent, partly because of reduced global supply following an outbreak of avian influenza, Statscan noted. Coffee and tea prices were up 16.8 per cent, while cereal prices rose 15.7 per cent.

Canadians also paid more for shelter in November. Rent was up by 5.9 per cent year-over-year, compared to a 4.7 per cent increase in October. Meanwhile, mortgage interest costs rose 14.5 per over the previous year, the largest increase since 1983.
…
Of the central bank’s two preferred core inflation measures, CPI-trim remained steady at 5.3 per cent, while CPI-median ticked up 0.1 percentage point to 5 per cent.

PerpetualDiscounts now yield 6.59%, equivalent to 8.57% interest at the standard equivalency factor of 1.3x. Long corporates yielded 4.86% on 2022-12-16 and since then the closing price has changed from 15.46 to 15.20, a decline of 168bp in price, with a Duration of 12.42 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies an increase in yield of about 14bp since 12/16 to 5.00%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to 355bp from the 370bp reported December 14.

TXPR closed at 536.60, down 0.78% on the day and setting a new 52-week low of 536.33. Volume today was 2.70-million, fifth-highest of the past 21 trading days.

CPD closed at 10.73, down 0.46% on the day. Volume was 142,560, below the median of the past 21 trading days.

ZPR closed at 8.90, down 0.67% on the day after setting a new 52-week low of 8.88. Volume was 239,970, below the median of the past 21 trading days.

Five-year Canada yields were up sharply to 3.08% today.

The attribution was more of the same, with a new player:

U.S. and Canadian stocks closed modestly higher on Tuesday after four sessions of declines, but investors fretted about weak holiday shopping and rising bond yields added pressure after the Bank of Japan’s surprise tweak of its monetary policy.

Fears about the economic impact of the Federal Reserve’s plan to keep raising U.S. interest rates have weighed heavily on equities since its policy meeting last week.

Adding to pressure on equity prices was an increase in U.S. Treasury yields after the BOJ made a surprise tweak to its bond yield control that allows long-term interest rates to rise more. In the U.S., the yield on the 10-year Treasury rose to 3.68% from 3.59% late Monday. The Canadian 10-year government bond yield was up 13 basis points by late afternoon to just above 3% – its highest level since the end of November.

The BoJ’s move caused much speculation:

Shares tanked, while the yen and bond yields spiked following the decision, which caught off-guard investors who had expected the BOJ to make no changes to its yield curve control (YCC) until Governor Haruhiko Kuroda steps down in April.

In a move explained as seeking to breathe life back into a dormant bond market, the BOJ decided to allow the 10-year bond yield to move 50 basis points either side of its 0-per-cent target, wider than the previous 25 basis point band.

But the central bank kept its yield target unchanged and said it will sharply increase bond buying, a sign the move was a fine-tuning of existing ultraloose monetary policy rather than a withdrawal of stimulus.

Mr. Kuroda said the move was aimed at ironing out distortions in the shape of the yield curve and ensuring the benefits of the bank’s stimulus program are directed to markets and companies.
…
The BOJ’s ultralow rate policy and its relentless bond buying to defend its yield cap have drawn increasing public criticism for distorting the yield curve, draining market liquidity and fuelling an unwelcome yen plunge that inflated the cost of raw material imports.

Much of that public anger has centred on Mr. Kuroda, who was hand-picked by former prime minister Shinzo Abe as BOJ governor a decade ago to rev up sluggish consumer demand with massive monetary stimulus.

In a rare acknowledgment of the drawbacks of his policy, Mr. Kuroda said the decision to widen the yield band now came from surveys showing a sharp deterioration in bond market functions.

He also said the BOJ must look not just at downside but upside risks to growth and inflation, signalling that there was scope for a withdrawal of stimulus next year if economic conditions allow.